Nontaxable Exchanges

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The 2017 tax reform law repealed IRC Section&nbsp;1044, which previously allowed taxpayers to roll over (and thus defer recognition of) certain capital gains from the sale of publicly traded securities if the amounts were used to purchase an interest in a specialized small business investment company (SSBIC).&nbsp;This repeal applies for tax years beginning after December&nbsp;31, 2017.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Prior to 2018, individual taxpayers and C corporations that invested in a specialized small business investment company (SSBIC, <em><em>see</em></em> below) could elect to roll over capital gain (within limits) on publicly-traded securities sold within 60 days of the SSBIC purchase. In order to defer the taxation of gain from such a sale, the individual or corporation was required to use the proceeds from the sale to purchase common stock or a partnership interest in a SSBIC within 60 days of the date of sale.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The amount of gain that could be rolled over for any taxable year by an individual was limited to the lesser of (a) $50,000 or (b) $500,000, reduced by any gain previously excluded under this rollover provision.&nbsp;Thus, the most an individual could roll over during his lifetime is $500,000.<a href="#_ftn3" name="_ftnref3">³</a> (The limits are $25,000 and $250,000, respectively, for married taxpayers filing separately.)<br /> <br /> In the case of C corporations, the gain that could be deferred could not exceed the lesser of (a) $250,000 or (b) $1,000,000, reduced by any gain excluded in previous taxable years.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> To the extent that gain from the sale of publicly-traded securities exceeded the cost of the SSBIC common stock or partnership interest subsequently purchased, such gain was taxed in the year of sale. Any gain that was characterized as ordinary income was not eligible for rollover treatment. In addition, gain previously rolled over under this provision could not be rolled over again.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Basis in the SSBIC common stock or partnership interest was generally reduced by the amount of gain that was rolled over. Despite this, the basis of any SSBIC stock was not reduced for purposes of calculating the gain eligible for the 50&nbsp;percent exclusion for qualified small business stock (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8683">8683</a>).<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> A &ldquo;specialized small business investment company&rdquo; is defined as any partnership or corporation that is licensed by the Small Business Administration under Section&nbsp;301(d) of the Small Business Investment Act of 1958, as in effect on May&nbsp;13, 1993.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Estates, trusts, partnerships, and S corporations were not eligible to take advantage of this rollover provision.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Former IRC &sect;&nbsp;1044.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;1044, repealed by Pub. Law No.&nbsp;115-97.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;1044(b)(1), repealed by Pub. Law No.&nbsp;115-97.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;1044(b)(2), repealed by Pub. Law No.&nbsp;115-97.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;1044(a), repealed by Pub. Law No.&nbsp;115-97.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;1044(d), repealed by Pub. Law No.&nbsp;115-97.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;1044(c)(3), repealed by Pub. Law No.&nbsp;115-97.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;1044(c)(4), repealed by Pub. Law No.&nbsp;115-97.<br /> <br /> </div></div><br />

<p> If certain requirements are met, a noncorporate taxpayer (including certain partnerships and S corporations) may exclude from gross income 100 percent of any gain from the sale or exchange of qualified small business stock held for more than five years if the stock was purchased after September 27, 2010.<a href="#_ftn1">¹</a></p><p>The OBBB created a new tiered exclusion structure for QSBS acquired after July 4, 2025, as follows:</p><ul class="rte2-style-ul" id="rte-259256f2-bfc7-11f0-9a12-17cca77a370c"><li>50% exclusion for QSBS held for three years</li><li>75% exclusion for QSBS held for four years</li><li>100% exclusion for QSBS held for five years.²</li></ul><p>For stock purchased before February 18, 2009, the exclusion was limited to 50 percent, and for stock purchased between February 18, 2009 and September 27, 2010, the exclusion was limited to 75 percent.³ With certain exceptions, a qualifying small business is: <br/><blockquote>A domestic C corporation (not an S corporation) with aggregate gross assets that do not exceed $75 million ($50 million for stock acquired prior to July 4, 2025) between August 10, 1993 and the date the stock was issued (the aggregate gross assets also cannot exceed the $50 75 million or $50 million threshold immediately after the stock was issued); <a href="#_ftn3">³</a> Any trade or business other than one involving the performance of legal, health, engineering, architecture, accounting, actuarial services, or any other trade or business in which the principal asset is the skill or reputa-tion of its employees; and At least 80 percent of its assets by value must be used in the active conduct of a qualified trade or business.</blockquote><br/> The aggregate amount of eligible gain from the disposition of qualified small business stock (QQBS) issued by one corporation that may be taken into account in a tax year may not exceed the greater of the following amounts: <br/><blockquote>(a)&nbsp; (a) $15 million (for stock acquired prior to July 4, 2025, the amounts were $10 million or ($5 million in the case of married taxpayers filing sepa-rately) reduced by the aggregate amount of such gain taken into ac-count in prior years; or (b) 10 times the aggregate bases of qualified stock of the issuer disposed of during the tax year. </blockquote><br/> For purposes of the limitation in (b), above, the adjusted basis of any qualified stock will not include any additions to basis occurring after the stock was issued.⁵</p><p> Gain realized by a partner, shareholder, or other participant that is attributable to a disposition of qualified small business stock held by a pass-through entity (i.e., a partnership, S corporation, regulated investment company, or common trust fund) is eligible for the exclusion if the entity held the stock for more than five years, and if the taxpayer held an interest in the pass-through entity at the time of acquisition and at all times since the acquisition of the stock.⁶</p><p> Significantly, a taxpayer is not entitled to the Section 1202 exclusion as well as the reduced capital gains rates (0 percent, 15 percent or 20 percent). Instead, the tax rate is subject to a maximum rate of 28 percent. Coupled with the 50 percent exclusion, the actual maximum effective rate on the gain is 14 percent. </p><p> Any gain excluded under IRC Section 1202 by a married couple filing jointly must be allocated equally between the spouses for purposes of claiming the exclusion in subsequent tax years.⁷</p><p> Special rules apply to IRC Section 1202 stock for alternative minimum tax purposes (<em><em>see</em></em> Q <a href="javascript:void(0)">8574</a> to Q <a href="javascript:void(0)">8579</a> for a discussion of the AMT). In the case of stock eligible for the 50 percent or 75 percent exclusion, an amount equal to 7 percent of the amount excluded from gross income for the taxable year under IRC Section 1202 will be treated as a preference item.⁸ If the stock is eligible for the 100 percent exclusion, no portion of the excluded gain will be treated as a preference item (this provision was made permanent by the PATH Act and was not changed by the 2025 OBBB). </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 1202(a)(4), as amended by ARRA 2009, ATRA and PATH. <em><em>See also</em></em> IRC § 1(h)(7). </p><p> 2. IRC § 1202(a)(5).</p><p> 3. IRC § 1202(a)(3). </p><p> 4. IRC § 1202(d)(1)(A). </p><p> 5. IRC § 1202(b). </p><p> 6. IRC § 1202(g). </p><p> 7. IRC § 1202(b)(3)(B). </p><p> 8. IRC § 57(a)(7). </p>

<div class="Section1">Generally, a noncorporate taxpayer, including certain partnerships and S corporations, may elect to roll over gain from the sale or exchange of qualified small business stock held more than six months to the extent that the taxpayer purchases other qualifying small business stock within 60 days of the sale of the original stock.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> If the taxpayer elects to roll over gain on the sale of qualified small business stock, gain will be recognized only to the extent that the amount realized on the sale exceeds (1) the cost of any qualified small business stock purchased by the taxpayer during the 60-day period beginning on the date of the sale, reduced by (2) any portion of such cost previously taken into account under this rollover provision. The rollover provisions of IRC Section 1045 will not apply to any gain that is treated as ordinary income.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Rules similar to those applicable to rollovers of gain by an individual from certain small business stock<a href="#_ftn3" name="_ftnref3">³</a> will apply to the rollover of such gain by a partnership or S corporation.<a href="#_ftn4" name="_ftnref4">⁴</a> Thus, for example, the benefit of a tax-free rollover with respect to the sale of small business stock by a partnership will flow through to an "eligible partner"—meaning a partner who is not a corporation and who held his partnership interest at all times during which the partnership held the small business stock.<a href="#_ftn5" name="_ftnref5">⁵</a> (A similar rule applies to S corporations and their shareholders.)<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> For the rules regarding (1) the deferral of gain on a partnership's sale of qualified small business stock followed by an eligible partner's acquisition of qualified replacement stock, and (2) the deferral of gain on a partner's sale of qualified small business stock distributed by a partnership, <em><em>see</em></em> Treasury Regulation Section 1.1045-1.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Any gain not recognized because of a rollover of qualified small business stock will be applied to reduce (in the order acquired) the basis for determining gain or loss of any qualified small business stock purchased by the taxpayer during the 60-day rollover period.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Ordinarily, the holding period of qualified small business stock purchased in a rollover transaction will include the holding period of the stock sold. However, for purposes of determining whether the nonrecognition of gain applies to the stock that is sold, the holding period for the replacement stock begins to run on the date of purchase. In addition, only the first six months of the taxpayer's holding period for the replacement stock will be taken into account for purposes of determining whether the active business requirement is met.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The taxpayer must make an election under IRC Section 1045 by the due date (including extensions) for filing the income tax return for the taxable year in which the qualified small business stock is sold.<a href="#_ftn10" name="_ftnref10">¹⁰</a> The election is made by (1) reporting the entire gain from the sale of qualified small business stock on Schedule D; (2) writing "IRC Section 1045 rollover" directly below the line on which the gain is reported; <em>and</em> (3) entering the amount of the gain deferred under IRC Section 1045 on the same line as (2), above, as a loss, in accordance with the instructions for Schedule D.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <hr /><br /> <br /> If a taxpayer has more than one sale of qualified small business stock in a taxable year that qualifies for the IRC Section 1045 election, the election can be made for any one or more of those sales. An IRC Section 1045 election is revocable only with the Commissioner's consent.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 1045(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 1045(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 1202.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 1045(b)(5).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  Treas. Reg. §§ 1.1045-1(b)(1), 1.1045-1(g)(3)(i).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  General Explanation of Tax Legislation Enacted in 1998 (JCS-6-98), p. 167 (the 1998 Blue Book).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.1045-1. TD 9353, 2007-2 CB 721.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 1045(b)(3).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.  IRC §§ 1045(b)(4), 1223(15).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.  Rev. Proc. 98-48, 1998-2 CB 367.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.  Rev. Proc. 98-48, 1998-2 CB 367.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.  Rev. Proc. 98-48, 1998-2 CB 367.<br /> <br /> </div>

<div class="Section1">Under IRC Section&nbsp;1202, if a taxpayer has an <em>offsetting short position</em> with respect to any qualified small business stock, the otherwise applicable 50&nbsp;percent exclusion (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8683">8683</a>) is unavailable unless:<br /> <blockquote>(a)&nbsp; the stock was held for more than five years as of the date of entering into the short position; <em>and</em><br /> <br /> (b)&nbsp; the taxpayer elects to recognize gain as if the stock were sold at its fair market value on the first day the offsetting position was held.<a href="#_ftn1" name="_ftnref1">¹</a></blockquote><br /> A taxpayer has an &ldquo;offsetting short position&rdquo; with respect to any qualified small business stock if the taxpayer (or a related party) has (a) made a short sale of substantially identical property, (b) acquired an option to sell substantially identical property at a fixed price, or (c) to the extent expected to be provided in future regulations, entered into any other transaction that substantially reduces the taxpayer&rsquo;s risk of loss from holding the qualified small business stock.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Taxpayers should note that certain offsetting short positions (e.g., a short sale) may also result in constructive sale treatment under the rules of IRC Section&nbsp;1259. While the IRC does not specifically address the impact of IRC Section&nbsp;1259 on IRC Section&nbsp;1202, it would appear that if the requirements of IRC Section&nbsp;1202(j) are otherwise met, the exclusion provided under IRC Section&nbsp;1202 would not be lost merely because the taxpayer may be required to immediately recognize gain under IRC Section&nbsp;1259.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;1202(j)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;1202(j)(2).<br /> <br /> </div></div><br />

<p> If a taxpayer fails to meet the ownership and use requirements, or sells multiple principal residences within the two-year period (<em><em>see</em></em> Q <a href="javascript:void(0)">8674</a>), a portion of the exclusion (as discussed below) may still be available if the principal residence is sold for reasons that were <em>primarily</em> caused by a change in the taxpayer's place of employment, health, or, to the extent provided in regulations, unforeseen circumstances.<a href="#_ftn1">¹</a> In determining a taxpayer's primary reason for selling a principal residence, the following factors are considered: <br/><blockquote> (1)&nbsp; Whether the sale and the circumstances giving rise to the sale are proximate in time; </blockquote><br/> For taxpayers claiming a Section 121 exclusion based on a change in place of employment, a safe harbor applies if the change in employment occurs during the period of the taxpayer's ownership and use of the property as a principal residence and the taxpayer's new place of employment is at least 50 miles from the residence that was sold.<a href="#_ftn3">³</a></p><p> Similarly, for taxpayers claiming the exclusion based on health reasons, a safe harbor exists for taxpayers whose physician has recommended a change in residence for health reasons.<a href="#_ftn4">⁴</a></p><p> The exception for a sale based on "unforeseen circumstances" may be met based on any of the following specific events: <br/><blockquote> (1)&nbsp; An involuntary conversion of the residence; </blockquote><br/> The taxpayer does <em>not</em> qualify for the exclusion based on unforeseen circumstances if the unforeseen circumstance is an <em>improvement</em> in the taxpayer's financial condition.<a href="#_ftn6">⁶</a><br/><blockquote><em>Example:</em> In April 2025 George buys a house that he uses as his principal residence. He sells it in October 2026 because the house has greatly appreciated in value and mortgage rates have substantially decreased, making a bigger house affordable.&nbsp;The specific event safe harbors described above do not apply. In examining the facts and circumstances of the case, the primary reasons for the sale of the house—the changes in George's house value and in the mortgage rates—are an improvement in his financial circumstances. However, an improvement in financial circumstances, even if the result of unforeseen circumstances, does not qualify for the reduced maximum exclusion by reason of unforeseen circumstances under IRC Section&nbsp;121(c)(2).<a href="#_ftn7">⁷</a></blockquote><br/> For purposes of determining the reduced exclusion, the maximum amount of gain that would have been excluded but for the premature sale of the principal residence is multiplied by a fraction. The numerator of the fraction equals the shorter of (1) the aggregate periods during the five-year period ending on the date of the sale or exchange that the property has been owned or used by the taxpayer as a principal residence, or (2) the period between the date of the most recent prior sale or exchange by the taxpayer to which the two-year limitation applied and the date of the sale or exchange. The denominator equals two years.<a href="#_ftn8">⁸</a><br/><blockquote><em>Example:</em> On July&nbsp;2, 2024, Ashley, a single taxpayer, purchased her first principal residence for $150,000. More than two years later, on August&nbsp;15, 2026, Ashley sold the home for $200,000. Because she met all the requirements of IRC Section&nbsp;121, Ashley excluded the entire amount of her gain. On September&nbsp;15, 2026, Ashley purchased a new principal residence for $250,000. Nine months later, on June&nbsp;15, 2027, Ashley sold the new principal residence for $275,000 because she lost her job and had to take a new job in a different state. </blockquote><br/> If the taxpayer is mentally or physically incapable of caring for himself, and the taxpayer owned and used the property as a principal residence for an aggregate of one year during the five-year period ending on the date of the sale or exchange, an exception to the use requirement applies. Such a taxpayer will be <em>treated as using</em> the property during any time within the five-year period that the taxpayer <em>owns</em> the property and resides in a facility (including a nursing home) licensed by the state or a political subdivision to care for such an individual.<a href="#_ftn9">⁹</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 121(c)(2). </p><p> <a href="#_ftnref2">2</a>. Treas. Reg. § 1.121-3(b). </p><p> <a href="#_ftnref3">3</a>. Treas. Reg. § 1.121-3(c)(2). </p><p> <a href="#_ftnref4">4</a>. Treas. Reg. § 1.121-3(d)(2). </p><p> <a href="#_ftnref5">5</a>. Treas. Reg. § 1.121-3(e)(2). </p><p> <a href="#_ftnref6">6</a>. Treas. Reg. § 1.121-3(e)(1). </p><p> <a href="#_ftnref7">7</a>. Treas. Reg. § 1.121-3(e)(4), Example 8. </p><p> <a href="#_ftnref8">8</a>. IRC § 121(c)(1). </p><p> <a href="#_ftnref9">9</a>. IRC § 121(d)(7). </p>

<div class="Section1">If a portion of a piece of property is used as the taxpayer's principal residence and another portion of that same property is used for business purposes, the taxpayer is required to allocate any gain on the sale of the property between the residential and business portions <em>if</em> the portion used for business is separate from the taxpayer's "dwelling unit."</div><br /> <div class="Section1"><br /> <br /> "Dwelling unit," for this purpose, is defined in IRC Section 280A as a house, apartment, condominium, mobile home, boat or similar property, except appurtenant structures (such as a detached garage, barn or stable located on the same land).<a href="#_ftn1" name="_ftnref1">¹</a> Only the gain from the portion of the property that is used as the taxpayer's principal residence (dwelling unit) may be excluded under Section 121.<a href="#_ftn2" name="_ftnref2">²</a><br /> <blockquote><em>Example</em>: Joe operates a dock installation business on a small lake. Rather than renting a separate office space, Joe uses a barn located one hundred feet from his home (the "dwelling unit") to store and repair any broken portions of the docks, as well as for general office space. During the past 10 years, the barn has been his place of business and the home has been his principal residence. In year 11, Joe sells the entire property for $360,000. Because the barn he used for his business is separate from his dwelling unit, he must allocate the basis of the property between the barn and the home.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> One way to allocate basis is based on physical size. To illustrate, when Joe acquired the property, the purchase price and basis for the entire property was $300,000. Physically, the home occupies 2/3 of the property and the barn occupies one-third of the property. Thus, based on size, the basis of home should be $200,000 and the basis of the barn should be $100,000. However, as a result of depreciation deductions Joe claimed on the barn, the basis had been decreased to $45,000.<br /> <br /> As to the sale of the property in year 11, Joe's overall economic gain is $60,000 ($360,000 selling price less $300,000 original purchase price). Based on the same allocation method described above, the gain should be allocated $40,000 to the home and $20,000 to the barn. As to the gain allocated to the home, since Joe meets the requirements of IRC Section 121, the entire amount of that gain is excluded from gross income.<br /> <br /> On the other hand, $20,000 of the gain is attributable to the barn. None of the gain attributable to the barn is excludable pursuant to IRC Section 121. Thus, it is as if Joe sold the barn for $120,000 (allocating 2/3rd of the $360,000 sales price to the barn). In other words, Joe's gain would be computed in the same way as if he had simply sold the barn. Thus, because his basis in the barn is $45,000, Joe's taxable gain would be computed as follows:</blockquote><br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td valign="top" width="126">Amount Realized</td><br /> <td valign="top" width="354">$120,000</td><br /> </tr><br /> <tr><br /> <td valign="top" width="126">Original Basis</td><br /> <td valign="top" width="354">$100,000</td><br /> </tr><br /> <tr><br /> <td valign="top" width="126">Capital Gain</td><br /> <td valign="top" width="354">$20,000 (amount of gain attributable to the appreciation of the barn from $100,000 to $120,000)</td><br /> </tr><br /> <tr><br /> <td valign="top" width="126">Adjusted Basis</td><br /> <td valign="top" width="354">$45,000 ($100,000 minus $55,000 depreciation deductions)</td><br /> </tr><br /> <tr><br /> <td valign="top" width="126">Unrecaptured Section 1250 gain</td><br /> <td valign="top" width="354">$55,000 ($100,000 original basis minus adjusted basis).</td><br /> </tr><br /> </tbody><br /> </table><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.121-1(e)(1); IRC § 280A(f)(1)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.121-1(e)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 1.121-1(e)(3).<br /> <br /> </div>

<div class="Section1">A taxpayer may be able to exclude gain on a sale of vacant land made within two years of the sale of a residence if certain requirements are met. A sale of vacant land can "piggy back" onto the sale of a taxpayer's principal residence provided (a) the vacant land is adjacent to a dwelling unit used by the taxpayer as the taxpayer's principal residence; (b) the taxpayer owned and used the vacant land as part of the taxpayer's principal residence; (c) the taxpayer sells the dwelling unit in a sale that meets the requirements of IRC Section 121 within two years before or two years after the date of the sale of the vacant land; and (d) the requirements of IRC Section 121 are otherwise met with respect to the land.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> For purposes of excluding the gain on the sale of the vacant land, the sales of the land and the dwelling are treated as a single sale. Therefore, the taxpayer's $250,000 ($500,000 for married couples) exclusion applies to the combined sale. If the sales take place in different tax years, gain on the sale of the dwelling unit is taken into account and excluded first. After, if there is any exclusion amount remaining, it will be applied to the sale of the vacant land.<a href="#_ftn2" name="_ftnref2">²</a><br /> <blockquote><em>Example:</em> In 2025, Asher, a single taxpayer who owns a primary residence with adjacent land, sells the primary residence for $400,000 with respect to which there is a $100,000 gain. Assuming Asher meets all the requirements of IRC Section 121, the entire $100,000 gain is excluded from gross income. Because a single taxpayer can exclude up to $250,000 of gain, there is $150,000 of remaining available exclusion. Later in 2025, Asher sells the adjacent land for $300,000 and realizes a $200,000 gain. Again, assuming the requirements of IRC Section 121 are met, Asher can exclude $150,000 of the $200,000 gain. This is because the sale of the home and the vacant land are treated as a single transaction. Since the total gain was $300,000 ($100,000 on the home and $200,000 on the vacant land), the $100,000 gain on the sale of the home is excluded, $150,000 of the gain on the land is excluded and $50,000 of the gain in excess of $250,000 is included in gross income.</blockquote><br /> If the taxpayer sells the dwelling unit in a tax year that begins <em>after</em> the tax year in which the vacant land is sold, and <em>after</em> the due date for the tax return for that earlier year, the taxpayer must include in gross income any gain on the sale of the vacant land in the year it is sold. Then upon the later sale of the dwelling unit, the taxpayer is permitted to claim the appropriate IRC Section 121 exclusion with respect to the vacant land by filing an amended return.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.121-1(b)(3)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.121-1(b)(3)(ii)(A).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 1.121-1(b)(3)(ii)(C).<br /> <br /> </div>

<div class="Section1">Pursuant to IRC Section 1036, common stock in a corporation may be exchanged for common stock in the same corporation tax-free. The nonrecognition rules of IRC Section&nbsp;1036 apply to exchanges of common stock in the same corporation, even though the stocks are of a different class and have different voting, preemptive, or dividend rights.<a href="#_ftn1" name="_ftnref1">¹</a> Nonrecognition treatment also applies to an exchange of preferred stock for preferred stock in the same corporation. However, gain or loss may be recognized if cash or other property is also received.&nbsp;This treatment applies both to exchanges between an individual shareholder and the corporation and to exchanges between two shareholders. Such an exchange is treated in substantially the same manner as a &ldquo;like-kind&rdquo; exchange (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8665">8665</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8669">8669</a>).<div class="Section1"><br /> <br /> Finally, the exchange of stock in different corporations and exchanges of common stock for preferred stock do <em>not</em> qualify for nonrecognition treatment even if the shares of stock are similar in all other aspects.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Rul. 72-199, 1972-1 CB 228;&nbsp;Treas. Reg. &sect;&nbsp;1.1036-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;1036, 1031(a);&nbsp;Treas. Reg. &sect;&nbsp;1.1036-1.<br /> <br /> </div></div><br />

<p> As a general rule, taxpayers may exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of gain on the sale of a principal residence.<a href="#_ftn1">¹</a> In order to qualify for this exclusion, the taxpayer must have owned and used the residence as the taxpayer's principal residence for two of the preceding five years.<a href="#_ftn2">²</a></p><p><hr></hr></p><p> <strong>Planning Point:</strong> Note that the Internal Revenue Code does not contain a definition of the term "principal residence." IRS guidance advises that, whether or not property is used by the taxpayer as his principal residence depends on all the facts and circumstances in each case, including the good faith of the taxpayer. Determinative factors include the taxpayer's place of employment, place of abode of family members, and the address listed on taxpayer's tax returns.<a href="#_ftn3">³</a></p><p><hr></hr></p><p> The use does not need to be continuous in order to satisfy this requirement, and short absences are disregarded for purposes of making the calculation. Thus, for example, a taxpayer who owns his principal residence for two years and takes a two-month vacation each summer will qualify for the Section 121 exclusion despite the fact that he was not physically present in his principal residence for a full 24 months.<a href="#_ftn4">⁴</a></p><p> The taxpayer may only take advantage of this exclusion once within each two-year period.<a href="#_ftn5">⁵</a><br/><blockquote><em>Example:</em> Example: Shannon and Mike sell their home in January 2026, excluding $50,000 of gain under IRC Section 121. In the same month, they purchase a new primary residence. Less than two years later, in August 2027, they sell that primary residence. Any gain on the 2027 sale cannot be excluded because they have already excluded gain from the sale of one principal residence under IRC Section 121 within a two-year period. The fact that their 2026 exclusion was only $50,000 of a possible $500,000 total exclusion is irrelevant.</blockquote><br/> However, in some cases, taxpayers may qualify for a reduced exclusion (i.e., a proportionate amount of the potential exclusion) if they sell multiple principal residences during a two-year period because of (a) a change in place of employment; (b) health problems or (c) certain unforeseen circumstances (<em><em>see</em></em> Q <a href="javascript:void(0)">8675</a> for a discussion of these exceptions).<a href="#_ftn6">⁶</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 121(b). </p><p> <a href="#_ftnref2">2</a>. IRC § 121(a). </p><p> <a href="#_ftnref3">3</a>. Treas. Reg. § 1.121-1(b)(2); IRS Chief Counsel Memo No. 200947036 (Nov. 20, 2009). </p><p> <a href="#_ftnref4">4</a>. IRS Pub. 523. </p><p> <a href="#_ftnref5">5</a>. IRC § 121(b)(3). </p><p> <a href="#_ftnref6">6</a>. IRS Pub. 523. </p>

<div class="Section1">Under IRC Section&nbsp;121, an individual may elect to exclude up to $250,000 ($500,000 for married couples) on the sale of a principal residence (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8674">8674</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8676">8676</a>).&nbsp;This exclusion is only available with respect to the taxpayer&rsquo;s principal residence. If a taxpayer has multiple residences, the taxpayer may still only exclude gain from the sale of the residence that is considered to be the principal residence.<div class="Section1"><br /> <br /> Whether or not a residence is considered the taxpayer&rsquo;s principal residence for purposes of the Section&nbsp;121 exclusion requires a traditional facts and circumstances analysis.<a href="#_ftn1" name="_ftnref1">¹</a> Assuming that the taxpayer alternates between two or more residences, the residence in which the taxpayer resides for the majority of the time generally will be considered the principal residence. Additionally, other factors are considered in making the determination, including the following non-exhaustive list:<br /> <blockquote>(1)&nbsp; the taxpayer&rsquo;s place of employment;<br /> <br /> (2)&nbsp; the principal place of residence of the taxpayer&rsquo;s family members;<br /> <br /> (3)&nbsp; the address listed by the taxpayer on his or her driver&rsquo;s license, tax returns, car registration and voter registration card;<br /> <br /> (4)&nbsp; the taxpayer&rsquo;s mailing address for bills and correspondence;<br /> <br /> (5)&nbsp; the location of the taxpayer&rsquo;s bank; and<br /> <br /> (6)&nbsp; the location of religious organizations and recreational clubs with which the taxpayer is affiliated.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> In a case involving two different residences that were located in different states, the&nbsp;Tax Court held that the taxpayer&rsquo;s principal residence was the one in which the taxpayer spent a substantial amount of time (i.e., threw family parties and celebrated holidays) even though the second residence address appeared on the taxpayer&rsquo;s tax returns over the years. In addition, the&nbsp;Tax Court rejected the IRS&rsquo; contention that the second residence was the taxpayer&rsquo;s principal residence because the taxpayer (1) owned a business in that state and (2) held a liquor license that required state residency.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> With respect to multiple residences, it is possible that over a five-year period, a taxpayer may not spend the majority of days in any one residence for the two required years.&nbsp;Thus, he or she would not be able to take advantage of the exclusion due to the failure to meet the two-year use requirement (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8674">8674</a>).<br /> <blockquote><em>Example:</em> In the past five years, Jim and Nancy alternated between homes in Michigan, Florida and New York. During that five-year period, they spent more time in the Florida residence than in any other home. <em>However</em>, within that period, there was only one year in which they spent the majority of days in Florida.&nbsp;Therefore, even though their principal residence is in Florida, they will be unable to exclude gain on its sale under Section&nbsp;121 because they will be unable to satisfy the two-year use requirement.<a href="#_ftn4" name="_ftnref4">⁴</a></blockquote><br /> Although not expressly addressed in the regulations, if the taxpayers were able to satisfy the two-year use requirement for more than one residence during the relevant five-year period, they should be able to exclude gain from the sale of <em>either</em> residence (but not both residences).<br /> <blockquote><em>Example:</em> During the previous five-year period, Jim and Nancy spend the majority of their days in Florida during years one and two. In years three and five, they spend the majority of their days in Michigan. If they choose to sell either of the Florida or Michigan residences, they will have satisfied the two-year use requirement for both residences and, assuming the other requirements are met, they should be able to exclude the gain on the sale of <em>either</em> residence as their principal residence.</blockquote><br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.121-1(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.121-1(b)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em>Wickersham v. Commissioner</em>,&nbsp;TC Memo 2011-178.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; <em><em>See</em> Guinan v. U.S.</em>, 2003-1 USTC 50,475 (2003).<br /> <br /> </div></div><br />